By John Helmer in Moscow
Suddenly this month, Hydro Aluminium, the state-led metal producer of Norway, has been called to public account by senior members of the Norwegian parliament; by independent Norwegian experts; and by Norway’s Trade and Foreign Ministers over the terms of alumina and aluminium contracts it signed last December with the Tajikistan Aluminium Plant (Talco, aka TadAZ). The focus of the Norwegian concern is allegations of corruption among Tajik government officials involved in the aluminium business, and on what Hydro knows, and is doing about it.
Talco is currently turning out about 450,000 tonnes of aluminium a year, worth about $1.2 billion on the international market. In December 2004, the Tajik government initiated a purge of the plant’s management, and defaulted on sale and purchase agreements with the ousted management, and with Hydro. The Norwegians sued for recovery in London; won a $150 million award in compensation for non-delivery of 80,000 tonnes of aluminium; collected compensation from a syndicate of insurers; and concealed the bookkeeping loss, and the payoff, in its consolidated accounts. Hydro has told Mineweb this isn’t concealment, because “the net exposure was immaterial for reporting purposes.”
Talco never paid, but begged to be forgiven. Between June and December of last year, the Norwegians trooped in and out of the office of Tajikistan’s President, Emomali Rahmon (Rahmonov), until they had a new deal. In December, Hydro announced it had agreed to sell the plant 150,000 tonnes of alumina per annum, and buy up to 200,000 tonnes of aluminium metal produced by the plant. Hydro has confirmed these numbers with Mineweb, adding that the alumina is delivered CIF Poti (a Georgian port on the Black Sea), and the metal to Hydro at a Baltic port on a FOB basis. According to the company, “Hydro does not disclose the exact prices of such contracts but we can say that this is LME linked.”
At current LME linked prices, the alumina is worth about $50 million; the metal is valued at $520 million. For the five years of Hydro’s agreement with Talco, Hydro’s turnover will be almost $3 billion.In statistical terms, this makes aluminium Tajikistan’s biggest business, and Norway one of Tajikistan’s most important trading partners. Hydro’s business negotiations with Talco have directly involved the governments of both countries, including President Rahmon, and the Norwegian Ambassador. Hydro has also told Mineweb “we have spent a lot of time discussing issues concerning transparency and corporate governance with the World Bank and EBRD and other NGO’s.”
The Norwegian government is the controlling shareholder of Hydro, with a stake of 43.8%. The company is also listed on the New York Stock Exchange, and operates under regulation by the US Securities & Exchange Commission. Several US banks hold directly, or as nominees, significant blocs of Hydro shares: Morgan Guaranty Trust (5.13%), State Street Bank & Trust (4.26%), JP Morgan Chase Bank (2.28%), Mellon Bank (0.55%), and Goldman Sachs (0.90%). Their involvement triggers US compliance requirements, for corruption alleged to involve officials of foreign governments comes under the long arm of US prosecutors and regulators, under the US Foreign Corrupt Practices Act.
Hydro told Mineweb last week that, although it has announced direct supply, sale and purchase agreements with the aluminium smelter company Talco, the cash is flowing through an intermediary company called Talco Management Ltd. (TML). A recent registration in the British Virgin Islands, this company won a public tender published in London last January 8. This called for “procurement of supply to TadAZ of raw materials (in required volumes and types) and electricity during the contract term.” The notice also provided that the winning bidder would arrange tolling contracts, and that “the toller will be required to pay tax on the products of processing on the customs territory of the republic of Tajikistan.” TML won the award.
Hydro admits it is dealing with TML. In a statement drafted by Hydro’s lawyers last week, the company told Mineweb that “Hydro purchases aluminium and sells alumina to Talco Management through commercial agreements that are an integrated part of the settlement agreement.” Hydro also explained that its relationship with TML is different from the tolling arrangement TML has with Talco the smelter. The latter is, according to the tender publication, a tolling arrangement, in which the smelter is paid a processing fee for converting the alumina to aluminium, b ut one in which the toller owns the inputs and outputs, not the smelter. In a tolling scheme like this, trading profit goes to the toller — that is, TML. According to Hydro, “we are not paying a processing fee as these are straight purchase and sales agreements. In other words, this is not a tolling arrangement.”
But what sort of arrangement does Hydro actually have? When Hydro first announced its deal with Talco last December, the announcement said: “Hydro and Tajik Aluminium Plant of Tajikistan have entered into new commercial arrangements.” The implication was that they were dealing directly. “We see this as a mutually beneficial agreement, where Hydro will receive the primary aluminium needed for our remelting operations and at the same time give assistance to TadAZ regarding operational issues. Hydro is committed to supporting TadAZ to increase their efficiency and production for the benefit of the Republic of Tajikistan,” Simon Storesund, Senior Vice President of Hydro was quoted as saying at the time.
Almost a year later, however according to a report on October 31 in Oslo by business magazine NA24, “Hydro admits that it does not have full control over the money they pay for aluminum from the smelting plant Talco, Tajikistan’s largest industrial company. Hydro is making payments to a company called Talco Management Ltd, which is registered in the British Virgin Islands. The Tajik government owns 70 percent of the company and 30 percent is owned by wealthy Tajik individuals.”
Mineweb asked Hydro last week whether it has satisfied itself on the identity, beneficial ownership, role, and financial operations of TML, and believes that Hydro’s transactions with TML are compliant with international standards?
Hydro replied: “Hydro has a zero tolerance towards corruption and we are following Hydro’s guidelines in all parts of the world where we are doing business. We have spent a lot of time discussing issues concerning transparency and corporate governance with the World Bank and EBRD and other NGO’s. Our opinion is that it is better for the people of Tajikistan that we are involved in doing business in the country than not. We have also seen a positive trend where the Tajik Government and Talco are taking steps in the right direction. However, we are fully aware of these challenges that we see in many developing countries in the world. However, we believe that Hydro has a lot to contribute with in regards to a positive development within the areas of Health, Safety and Environment in Talco, which would benefit the workers and the environment as well as the Talco smelter operations.”
In practice, Hydro is doing its buying and selling with the British Virgin Islands company, not with Tajikistan. And what happens to the smelter and its workers is TML’s business, not Hydro’s. For all Hydro knows, TML could be over-charging the plant for electricity and alumina, under-paying for metal, and shorting the plant workers for wages. The World Bank has charged Tajik government officials with profiteering with the supply of electricity to state enterprises, and so Mineweb asked Hydro what it knows about this crucial factor in the profitability of the smelter.
Hydo passed the buck to TML. “Hydro purchases aluminium and sells alumina to Talco Management and there is no connection [for Hydro] to Talco’s electricity prices,” the company statement responds.
Regarding what it knows about TML, Hydro’s lawyers testify: “Talco Management Ltd has also undertaken an obligation to be audited by an international recognised auditor. Such audit reports are to be displayed to the World Bank, EBRD and Hydro.” To clarify the future, indefinite, and passive form of this wording, Hydro was asked what auditor has been selected, what are the dates of commencement and completion of the first audit period, and when Hydro expects to see this auditor’s report? Hydro spokesman Thomas Knutzen refused to answer the questions. Instead, he said: “if you want information regarding the audit of Talco Management, we suggest if you inquire directly with Talco Management.”
TML does not respond at the contact numbers publicly listed, nor does Talco. But Hydro’s refusal reinforces the NA24 report that the Norwegian company does not know, or does not want to admit that it has not seen an auditor’s report on the cashflow of TML. This suggests that Hydro’s money is flowing, not through a transparent and audited channel of the Tajik state company, but through the Caribbean cutout, which claims legal control over 100% of the inputs and outputs of the smelter.
Testimony given in the London courts in cases brought by Hydro against Talco in 2005, as well as by the Ansol group of companies, which managed the smelter until 2004, suggests that the last international auditor to review the smelter’s accounts was PriceWaterhouseCoopers (PWC). The last audit according to international standards was reported for calendar and financial year 2002, and completed by PWC in 2004. Since then, there is only a warning from a World Bank report on the smelter, dated June 2004. This noted “the company is not governed by a Board of Directors or any other type of executive committee. Instead, it is under the sole command of its director, who reports only to the Tajik President at a monthly meeting”. The World Bank’s study also reported “more than 98 percent [of the plant’s aluminium] is exported to a limited number of customers incorporated overseas, under exclusive contractual agreements. The ownership of these companies is unclear.”
Hydro has told Mineweb it has been “discussing issues” with the World Bank, but there is no sign that Hydro or the Bank has implemented the following Bank recommendation in the June 2004 report: “The [Tajik] Government should create a unit to monitor [TadAZ’s] quarterly financial flows, debt and arrears, as well as financial and other performance targets. In addition, the unit should oversee governance arrangements, including appointment of Directors and the publication of regular financial information, audited financial statements and company charters.”
In fact, Hydro has gone in the opposite direction, backing President Rahmon’s control of the aluminium cashflow, and suggesting he legitimize his position on a visit to Oslo, as guest of the company and the King of Norway. Norwegian media have reported, and Hydro has now confirmed to Mineweb, that Hydro’s director Eivind Reiten attempted earlier this year to lobby for a state visit to Norway by Rahmon. Foreign Minister Jonas Store refused.
Asked to explain why Hydro had taken Rahmon’s part in Oslo, the company told Mineweb: “In Mr. Støre’s reply to Mr. Reiten in May 2007, he stated [translation ours] “visits on a governmental level in countries in Central Asia have so far been limited. The political contacts should develop gradually in accordance with other relations and weight is given to the totality of Norway’s relationship to the country in question. I am therefore positive to a visit to Tajikistan and other Central Asian countries at the State secretary (Parlimentary Under-Secretary) level.” No other reasons were given by nor discussed with Mr. Støre.”
A source in Oslo said that Hydro executives have also been summoned recently to the Trade Ministry to explain their relationship with Rahmon, the Tajik smelter, and the Caribbean cutout.
According to business magazine NA24, government ministers are not the only ones to be skeptical. Ingvild Vaggen Malvik, a member of the Norwegian Parliament’s Commerce Committee, told NA24 that the record of Hydro’s dealings in Tajikistan, “sounds like a story about corruption from the beginning…I get the feeling that this is a company that needs to do some housecleaning. Several things point in the same direction and there are indications that procedures must improve. It is clear that there are many challenges when doing business abroad, especially in regimes such as Tajikistan.” A second member of the Norwegian parliament, Sigvald Oppebøen Hansen, a Labor party member on the Commerce Committee, is reported by NA24 as saying of Hydro: “This doesn’t sound good… It’s easy to fall into a trap, so you must develop procedures to avoid it. If this is the case, it just adds to the list of too many unfortunate cases.”
In the NA24 publication, reporter Trond Gram also quotes an Oslo expert on corporate governance problems. “My reaction is that it is apparent that Hydro is accommodating corruption. It’s not that they are making bribes themselves, but that they are accommodating the problem.” The comment came from Ivar Kolstad, senior researcher at Chr. Michelsens Institute, who is working on an institute project, “Corruption in Natural Resources Management.”
Inside Hydro, company executives admit there has been misreporting of the aluminium trading accounts and revenues of the Talco smelter. And because of the dominant share of industrial output and trade, which the plant takes in the impoverished Tajik economy, the misreporting also extends to Tajikistan’s Gross Domestic Product, imports, exports and balance of payments — statistics which are prepared under the supervision of the International Monetary Fund and World Bank. How effective this supervision can be when the financial flows through the Caribbean are not counted is a question Hydro and the World Bank have been asked by Mineweb to consider. Until this month’s disclosures in Oslo, there had been no reply.
Norwegian sensitivities to Hydro Aluminium’s exposure in Tajikistan, arise at a doubly awkward time for the state as controlling shareholder, and for Norwegian corporate regulators. The latter are already investigating alleged corruption in the conduct of Hydro’s sister company and energy affiliate StatoilHydro, which has been accused of involvement in improper payments to government officials in Libya and elsewhere, in return for lucrative concessions.
Hydro was asked if its risks in Tajikistan are still insured. According to the company, “Hydro believes that it has appropriately mitigated any significant risks related to these transactions either through the contractual terms or by designated security arrangements. The details of these arrangements are confidential.” A source close to Hydro says the company is using a corporate captive to insure itself in Tajikistan. Spokesman Knutsen also told Mineweb that “as Hydro is listed on the NY Stock Exchange, Hydro follows the SEC Rules and is assisted in this regard by US counsel.”